This article is sponsored by Siteline.

Getting the best out of your subcontracting business requires a multifaceted approach. It’s not just about delivering top-notch craftsmanship; it’s equally about improving your back-office workflows to ensure optimal cash flow. The key? Knowing how to implement and analyze cash forecasts.

Regular cash forecasting empowers subcontractor billing teams with the knowledge required to build more profitable and sustainable businesses. So, if you’re curious about the benefits of cash forecasts, key components of the forecasting process, or strategies to take your forecasting to the next level, read on.

Cash Forecasting Defined

Cash forecasting is the process of estimating the amount of cash that will flow in and out of your business over a specific period of time — also known as your cash inflows (like progress payments, retainage, material reimbursements, etc.) and outflows (like material and labor costs, equipment rentals, lower-tier payments, overhead expenses, etc.)

This data is essential for creating clear cash flow statements and billing projections, providing a snapshot of your company’s liquidity and financial performance in the near term and over time.

Difference Between Cash Forecasts & Billing Projections

It’s important to note that cash forecasting differs from running billing projections. Though both are critical tools for managing finances, each has a distinct purpose in financial planning. Take a look.

Cash Forecasts

• Predict actual payment receipt and disbursement dates
• Offer a clear, accurate picture of short-term financial health and liquidity
• Primarily based on completed billings and known financial obligations
• Handled by controllers and CFOs

Billing Projections

• Estimate future invoicing amounts and dates
• Gauge future backlog and inform long-term cash expectations
• Based on project timelines, contract values, and potential variables
• Typically handled by project managers

While billing projections are valuable for strategic planning, cash forecasts are crucial for day-to-day financial decision-making, helping identify near-term cash surpluses and shortfalls.

Importance of Cash Forecasting for Subcontractors

Unlike GCs, subcontractors face longer payment cycles, often waiting up to 90 days for reimbursement. This extended payment cycle leaves their cash particularly vulnerable. A single late payment, unexpected cost overrun, or sudden dip in the market can significantly strain working capital, making it difficult to cover overhead, meet payroll, and take on new projects.

Creating — or leveraging — a system for quick, accurate cash forecasts provides the subcontractor with invaluable insight into when money will enter and exit your business.

The main advantages of this boil down to:

1. Enhanced financial decision-making: Knowing when you’ll have extra cash or when you might be running low makes it easier to balance day-to-day needs with plans for the future.
2. Improved operational efficiency: Forecasting helps reduce reliance on external financing while improving supplier relationships through on-time payments. It also keeps pre-construction and project teams aligned.
3. Increased business stability: Regular forecasting is crucial for surfacing red flags and making necessary adjustments to maintain a healthy financial buffer, weathering tough times or seasonal variations.
4. Boosted stakeholder confidence: Reliable cash flow projections demonstrate a company’s ability to meet financial obligations, attract new business opportunities, and secure the financing required to pursue them.

Creating Cash Flow Forecasts

There’s a lot that goes into creating accurate cash flow forecasts. The following is a breakdown of the most essential steps.

Verifying & Gathering Data

Ensure you have access to accurate, up-to-date information from your accounting software, project management tools, and specialized construction software.

Preparing Forecasts

With reliable data in hand, the next step is to create cash forecasts for each ongoing project.

1. Choose your forecasting methods: While spreadsheets have been the go-to tool, specialized software is becoming increasingly essential for its ability to create quick, visual, and shareable projections.
2. Calculate cash flow estimates: Start with your current cash balance, add expected inflows, and subtract expected outflows to determine the ending cash balance for each period.
3. Consider key variables: Consider payment terms, project timelines, and historical client payment patterns to create more accurate forecasts.
4. Expect the unexpected: Incorporate a buffer to account for unexpected expenses or delays potentially stemming from seasonal fluctuations or economic indicators like interest rates and material costs.

Reviewing & Adjusting

Establish a routine for reviewing your forecasts against actual cash flows, identifying variances, and adapting to changing circumstances. Some teams use rolling forecasts, continuously extending the forecast horizon as previous periods are completed. This method can help maintain a more up-to-date picture of cash flow, helping you respond more quickly to project or industry changes.

Additional Tips for Effective Forecasting

Consider these remaining tips as additional food for thought as you establish — or finesse — your current forecasting process.

• Track actuals: Regularly compare your forecasted figures to real income and expenses to identify any discrepancies and make necessary budget adjustments. This information can also be used to fine-tune future forecasts.
• Stress-test your model: Assess forecasting resilience under various “what-if” scenarios (e.g., project delays, payment defaults, sudden price increases) to identify and prepare for potential vulnerabilities.
• Leverage technology: Modern cloud-based tools can streamline the forecasting process and provide deeper insights, helping you better predict payment timelines and identify patterns that might have been missed during spreadsheet analysis.

By mastering cash flow forecasting, subcontractors can navigate the unpredictable construction landscape with greater financial clarity and confidence. Whether you're looking to make strategic decisions, improve operational efficiency, or boost stakeholder trust, this skill is essential for building a sustainable, profitable business.